Regulators Ramping Up Fair Lending Enforcement

The NCUA and Consumer Financial Protection Bureau have placed more emphasis on Fair Lending laws and Home Mortgage Disclosure Act data collection in 2013, and credit unions can expect additional rules and exams in 2014.

Some are also anticipating the anti-discrimination reporting and compliance could be expanded to apply to auto financing, business loans and credit cards, which could change the way credit unions lend to members.

The CFPB announced in July it will begin writing a proposed rule this month to amend HMDA to require significantly more information from lenders, as mandated by the Dodd-Frank Act. In addition to a laundry list of loan terms information, lenders may also be required to provide identifiers for loans, parcels and loan originators.

“The CFPB expects to begin developing proposed regulations concerning the data to be collected and appropriate format, procedures, information safeguards and privacy protections for information compiled and reported under HMDA,” the regulator said when it announced its rulemaking agenda earlier this year.

The CFPB also said it may consider additional revisions to its regulations to accomplish the purposes of HMDA.

CUNA Mutual Director of Regulatory Compliance Bill Klewin said the CFPB, along with federal agencies like the Department of Justice and Department of Housing and Urban Development, have taken very active roles in pursuing fair lending cases, specifically using data to determine by disparate impact if lending practices have a disproportionately adverse impact on minorities.

Klewin said the agencies have turned to disparate impact tests because obvious discriminatory acts of the past, such as refusing to lend to women solely on the basis of gender or requiring minority borrowers to sign loan documents in person, aren’t as prevalent today.

“There’s this inherent, insidious way of discriminating against people that’s really hidden and hard to find, but it’s still there,” Klewin said.

However, Klewin said credit union field of membership limitations cause most credit unions to produce HMDA statistics that would often define them as statistic outliers compared to lenders who serve the general public. When a lender is branded with that statistic outlier title, it may also prompt a review by authorities.

In March, the NCUA released a Letter to Federal Credit Unions that outlined its updated fair lending exam program and was accompanied by a new Fair Lending Guide that addressed compliance requirements for HMDA, the Equal Credit Opportunity Act and Fair Housing Act. All credit unions with more than $42 million in assets as of Dec. 31, 2012 must file HMDA data if they had an office in a Metropolitan Statistical Area and originated at least one purchase or refinance mortgage during 2012, according to the NCUA. Additionally, all credit unions with fewer than $10 billion in assets are subjected to fair lending laws.

In the letter, the NCUA said federal credit unions that are HMDA outliers and demonstrate the potential for higher fair lending risk could be subjected to a fair lending exam.

Next Page: FOM Not a Factor

NCUA Director of Consumer Compliance Policy and Outreach Tonya Sweat said the regulator, which must follow the same fair lending procedures as other regulators, does not take field of membership limitations into consideration when reviewing HMDA data and other factors to determine if a fair lending exam is necessary. During an April 2013 webinar on the topic, she also said that a credit union’s status as a HDMA outlier would make the difference between the NCUA conducting an offsite supervision contact or onsite fair lending exam.

“I'll have to be honest with you, the data we are looking at and the comparisons that we make include the data that is filed by banks and others who are required to file under the Home Mortgage Disclosure Act,” Sweat said during the webinar. “So I know some people might be thinking are we only looking at federal credit unions exclusively when we're determining HMDA outliers, and the answer to that is 'no.'”

Sweat later explained during an interview that all regulators have a statutory obligation to regulate and enforce fair lending laws, regardless of the regulated entity’s charter. However, she cautioned that HMDA data is only one method regulators use to identify discriminatory practices.

Other factors include any fair lending violations revealed during safety and soundness exams, the credit union’s recent CAMEL rating and other risk factors that include the volume, types or complexity of lending products and services, the types of communities the credit union serves and if the lender has been the subject of any lending discrimination complaints.

However, if a credit union is selected for a fair lending exam, Sweat said field of membership is taken into consideration as the NCUA conducts its scoping review, in which the examiner researches the credit union’s operations, which includes the market it serves. Only after the NCUA’s exam could a credit union be referred to HUD or DOJ for further enforcement of fair lending violations, she added.

Field of membership restrictions are defined by legislation and NCUA rules, said Olympia, Wash.-based consultant Marvin Umholtz, but they are in conflict with fair lending laws.

“That’s going to be an incentive to either force a credit union to become a community credit union, or there may be some statutory changes that will eliminate field of membership,” he said.

At the very least, both Klewin and Umholtz said the new emphasis on disparate impact will influence how credit unions lend to members.

For instance, Klewin said the CFPB’s qualified mortgage rules make small dollar mortgages unprofitable for some credit unions, which is a valid business reason.

“But the examiner and DOJ could argue disparate impact has occurred, even though there was no intention to discriminate,” Klewin explained. “Credit unions could counter by saying there’s no other way to meet that legitimate business need, but then you’d get caught in a tit for tat situation where the government would say, ‘yes there is, you need to do lending the following way instead.’”

Umholtz said he thinks credit unions will tighten up lending to influence their HMDA statistical outcomes.

“The new assertiveness of the NCUA, CFPB, Justice Department, HUD and others will make this a big influence in 2014,” Umholtz said. “Even state regulators will be looking at this exam hot button flavor of the year.”

He added that disparate impact will be included on a short list of items examiners will be incentivized to look at next year because regulators, including the NCUA, have been scolded in the past for not doing enough to prevent discrimination.

Sweat said fair lending exams are risk focused, and as a result, only 55 to 75 federal credit unions would receive either a fair lending examination or offsite supervision contact in 2013.

Next Page: An NCUA Q&A

In a question and answer sheet released with the NCUA’s Fair Lending Guide, the agency said during offsite supervision, Office of Consumer Protection staff would review the credit union’s lending policies, procedures, training program, audit or verification assessments, compliance risk assessment, and marketing or advertising program or materials. At the conclusion of the supervision, the NCUA would provide in a conference call an oral report of findings and recommendations to senior management and officials. Federal credit unions would also receive a written report of the results within three to five business days of the call.

A fair lending exam would require credit unions to prepare items listed by the NCUA in its notification letter. The exam would also include a loan officer questionnaire, information about products and services and data in an electronic format detailing approved and denied loans.

Another issue for credit unions is the lack of clarity regarding how they can determine if they are in compliance and how to plan for a fair lending exam.

“You can do self-exam testing and you may determine you’re good with a solid risk-based matrix and sound credit scoring system, but if you produce data that indicates disparate impact, that might not matter,” Klewin said.

Sweat said during the webinar the NCUA does not share with federal credit unions the tool it uses to determine if a lender is an HMDA outlier, but added the regulator would share the reports it generates with a credit union if it were selected for additional fair lending supervision.

“No matter whether you're going through a fair lending examination or whether you're going through an offsite supervision contact, (our goal) is to educate federal credit unions about fair lending compliance,” Sweat said. “So we're not going to hide the ball from you, if that makes sense. We will share with you the information that we have regarding your HMDA data and allow you to use it to make improvements or enhancements, if necessary, to your fair lending compliance program.”

Umholtz said DOJ settlements of fair lending violations look like they were designed to extract money from lenders after the government threatened the institution with reputation risk.

Umholtz also said he’s worried the credit union community hasn’t paid enough attention to disparate impact issues and after regulators start writing up institutions for compliance exceptions, it will be too late.

“It will be so imbedded in the exam process, the NCUA, CFPB and everybody else will be hard to disrupt unless the Supreme Court acts to force the government to modify its position,” he said.

In June, the Supreme Court agreed to hear Mt. Holly Gardens Citizens in Action v. Mt. Holly, a case involving the gentrification of a New Jersey neighborhood that is the first case challenging disparate impact that has reached the nation’s highest court. The court is not expected to rule on the case until next year. Sweat said until that case is resolved, the NCUA would continue to abide by current fair lending regulations and exam procedures.

During the April 4 Webinar, NCUA Consumer Affairs Analyst Ken Bailey said fair lending supervision is not considered material supervision determinations and therefore are not eligible for the regulator’s formal appeal process. If a credit union disagrees with its fair exam report, it may only request that the OCP review its concerns; only the OCP director can resolve any concerns or disputes, he said.

The CFPB is moving forward not only with new HMDA rules but also will examine the lending practices of auto financers that Klewin said could have many credit unions shuttering their indirect lending programs to avoid disparate impact issues.

“The NCUA will, in all likelihood, fall into line and examine indirect lending programs because the CFPB has taken the position that if you’re an indirect lender, you’re a creditor and subject to fair lending laws,” he said.

NAFCU Senior Regulatory Affairs Counsel Tessema Tefferi said his trade association supports fair lending, and added that credit unions are second to none in ensuring their lending practices are conducted in a fair and non-discriminatory manner. However, he said NAFCU takes exception to the CFPB’s actions in indirect lending.

“(It) essentially treats the auto dealer as a third-party service provider of the credit union, increasing a credit union’s risk for liability and giving the CFPB a way to reach auto dealers in the absence of direct statutory authority,” Tefferi said.

Umholtz called the emphasis on disparate impact good intentions gone wild, and said the practice won’t have the results its supporters think it will.

“It will be the ugliest unintended consequences when it hits full bore, and the NCUA is only a small part of it,” he said.